Investors asked to vote against JSPL plan to sell 96.42% in Jindal Power

By: |
August 28, 2021 4:00 AM

The company’s debt for 9 months of FY21 was at Rs 6,760 crore, a drastic reduction from Rs 7,390 crore posted for the 12-month period of previous financial year. (IiAS said that JPL did not disclose cash profits and debt levels when it announced in fourth quarter results in FY21.)

The company’s move comes ahead of its EGM on September 3 to seek shareholders’ assent for stake sale to Worldone, a company owned by the Jindal family.The company’s move comes ahead of its EGM on September 3 to seek shareholders’ assent for stake sale to Worldone, a company owned by the Jindal family.

A proxy advisory firm has raised concerns over Jindal Steel and Power’s (JSPL’s) proposal to divest its 96.42% stake in subsidiary Jindal Power (JPL). Calling it “selling family silver”, Institutional Investor Advisory Services India (IiAS) has recommended “voting against” the proposal and added that the audit committee, which has approved this transaction, “lacked independence”.

Terming it a related-party transaction, the firm said shareholders have the power to stop this, while raising the question: “Is JSPL selling family silver under the garb of debt reduction?”

In June, a newly-composed audit committee, which approved the final bid from WorldOne, comprised independent directors with a tenure of just 8 days.

IiAS believes it would have been unlikely for the newly-reconstituted audit committee to be able to make an informed decision on a transaction that was already well-ahead on its process of completion.

The company’s move comes ahead of its EGM on September 3 to seek shareholders’ assent for stake sale to Worldone, a company owned by the Jindal family.
In May, JSPL had sought shareholders’ approval to divest the stake in JPL for Rs 3,015 crore in a cash deal. However, a day before the meeting on on May 21, the company cancelled the EGM due to investor concerns.

According to the contours of the deal, inter-corporate deposits (ICDs) and capital advances of Rs 4,386 crore given to JSPL by JPL were to be converted into loans. Further, JSPL would continue to hold the redeemable preference shares (RPS).

JPL has issued about 290-crore 20-year RPS and about 390 crore 5% cumulative RPS (both of face value Rs 10 each) to JSPL.

Now, JSPL has come up with a revised offer, which IiAS says is not “better” than the earlier one. Under the new offer, JSPL proposes to sell the same quantum of stake for the same price. WPL would take over the ICDs and capital advances of Rs 4,386 crore, which would essentially be set off against outstanding RPS.

“The preference shares, the outstanding ICDs and capital advances, were all transacted at a time when JPL was a wholly-owned subsidiary of JSPL. To this extent, one can consider these transactions to be a function of managing cash flows and liquidity. In the revised offer, while the equity value remains the same at Rs 3,015 crore, the preference shares are being offset against the ICDs and capital advances,” it said in a note to investors. “This is a natural set off and should have been done to clean the books in the first instance,” it added.

“While the audit committee composition was compliant with regulations, we believe the audit committee, which has approved this transaction, lacked independence,” IiAS said. JSPL’s rationale behind selling its power business was to become a net cash company. IiAS refutes this, and states that JPL has stable operations and is a cash generating business with sustainable debt.

The company’s debt for 9 months of FY21 was at Rs 6,760 crore, a drastic reduction from Rs 7,390 crore posted for the 12-month period of previous financial year. (IiAS said that JPL did not disclose cash profits and debt levels when it announced in fourth quarter results in FY21.)

Further, JSPL is of opinion that the divestment would help in reducing CO2 emissions by about 50%. According to IiAS, JPL’s plant load factor has been in the range of 30-40%, and therefore, the reduction in carbon footprint will be equally measured.

The proxy advisory firm also said that WorldOne currently holds investments in Jindal family companies and has JSPL Executive Chairperson and promoter Naveen Jindal as its majority shareholder.

Sold family silver in past too
According to IiAS, JSPL has sold family silver in the past too. In July 2020, the company’s shareholders approved sale of Jindal Shadeed Iron & Steel LLC (JSIS), a wholly owned step-down subsidiary, to Templar Investments, a promoter entity.

“Even then, a business (JSIS) with stable operations and sustainable debt, was sold to a promoter-owned entity, while the company argued for debt reduction. Shareholders approved that transaction at a time when the Covid crisis had caused liquidity pressures and the company was in the midst of restructuring its debt with international lenders,” it said.

Earlier, in May, another proxy advisory firm InGovern had also asked JSPL shareholders to reject the proposal stating that the enterprise value of JPL is in the range of Rs 10,000-12,000 crore. With the revised transaction, InGovern has recommended shareholders vote for the transaction as the enterprise value has increased to near market comparable valuation.

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